CUET UG Accountancy Booster Test 3 Types of Debentures -

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CUET UG Accountancy Booster Test 2 Types of Debentures

⏱️ 30 Minutes

❓ 20 Questions

📌 Answers are locked once submitted — results and explanations appear at the end.

CUET UG Accountancy Booster Test 2 Types of Debentures

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QUESTION 1 OF 20

A company goes into default. It has outstanding secured debentures of Rs. 10 Lakhs with a fixed charge on a building (sold for Rs. 8 Lakhs) and floating charge on other assets (sold for Rs. 5 Lakhs). How much is recovered strictly from the fixed charge?

Answer Review

1 A company goes into default. It has outstanding secured debentures of Rs. 10 Lakhs with a fixed charge on a building (sold for Rs. 8 Lakhs) and floating charge on other assets (sold for Rs. 5 Lakhs). How much is recovered strictly from the fixed charge?

A Rs. 10 Lakhs

B Rs. 5 Lakhs

C Rs. 8 Lakhs

D Rs. 2 Lakhs

💡 Short Explanation

Fixed charge applies to specific assets. Building sale proceeds determine recovery. Building realized Rs. 8 Lakhs.

✅ Correct Answer Explanation

A fixed charge is attached to a specific asset. Here, the building carrying the fixed charge was sold for Rs. 8 Lakhs. Therefore, the recovery from the fixed charge is limited to Rs. 8 Lakhs. Hence, option C is correct.

❓ Why Other Options Are Incorrect

Option A → Total debenture amount is not fully recovered from fixed charge.
Option B → Represents unrelated value.
Option D → Incorrect calculation.

🎯 Strategy

Used

Substitution

Application:

�� Identify amount realized from fixed-charge asset.

Final Logic:

�� Fixed charge recovery equals sale proceeds of charged asset.

🧠 Memory Trick

"Fixed Charge = Specific Asset Recovery"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Secured Debentures – Page X

2 Assertion (A): Unsecured debentures do not have a specific charge on the assets.
Reason (R): A floating charge may sometimes be created on these debentures by default, even though normally these are not issued.

A Both A and R are true, and R is the correct explanation of A

B Both A and R are true, but R is NOT the correct explanation of A

C A is true, R is false

D A is false, R is true

💡 Short Explanation

Unsecured debentures lack specific security. Floating charge may arise in exceptional cases. Reason explains unsecured nature.

✅ Correct Answer Explanation

Unsecured debentures generally do not carry a specific charge on company assets. However, in certain situations, a floating charge may arise, explaining their broader unsecured nature. Therefore, both Assertion and Reason are true, and Reason correctly explains Assertion.

❓ Why Other Options Are Incorrect

Option B → Reason directly supports Assertion.
Option C → Reason is also true.
Option D → Assertion is definitely true.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

�� Evaluate relationship between assertion and reason.

Final Logic:

�� Floating charge explains absence of specific security.

🧠 Memory Trick

"Unsecured = No Specific Charge"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Unsecured Debentures – Page X

3 Analyze the following concerning a fixed charge:
I. It involves all assets excluding those assigned to secured creditors.
II. It is created against specific assets held for sale.

A Only I is correct

B Only II is correct

C Both I and II are correct

D Neither I nor II is correct

💡 Short Explanation

Fixed charge applies to specific fixed assets. It does not cover all assets. It is not created over assets held for sale generally.

✅ Correct Answer Explanation

Statement I is incorrect because a fixed charge does not involve all assets; it applies only to specific identified assets. Statement II is also incorrect because fixed charges are usually created on long-term fixed assets, not assets held for sale. Therefore, option D is correct.

❓ Why Other Options Are Incorrect

Option A → Statement I is false.
Option B → Statement II is false.
Option C → Both statements are incorrect.

🎯 Strategy

Used

Elimination

Application:

�� Compare characteristics of fixed and floating charges.

Final Logic:

�� Fixed charge relates only to identified long-term assets.

🧠 Memory Trick

"Fixed Means Specific"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Fixed Charge – Page X

4 What is the distinguishing conceptual feature of a floating charge compared to a fixed charge?

A It only applies to registered debentures

B It encompasses all general assets excluding those assigned to secured creditors

C It strictly applies to a single piece of machinery

D It does not provide any security in case of default

💡 Short Explanation

Floating charge covers general assets. It is not tied to one specific asset. Crystallizes on default.

✅ Correct Answer Explanation

A floating charge extends over the general assets of the company that are not specifically charged elsewhere. Unlike fixed charges, it is flexible and crystallizes upon default. Hence, option B is correct.

❓ Why Other Options Are Incorrect

Option A → Floating charge is not limited to registered debentures.
Option C → Describes fixed charge.
Option D → Floating charge still provides security.

🎯 Strategy

Used

Conceptual Matching

Application:

�� Distinguish floating charge from fixed charge.

Final Logic:

�� Floating charge covers circulating/general assets.

🧠 Memory Trick

"Floating Covers General Assets"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Floating Charge – Page X

5 Determine the correct sequence for the lifecycle of a redeemable debenture:
1. Repayment of the lump sum or instalments
2. Expiry of the specific period
3. Issue of the debenture with specific tenure

A 1, 2, 3

B 2, 1, 3

C 3, 2, 1

D 1, 3, 2

💡 Short Explanation

Debentures are issued first. Tenure expires next. Repayment occurs at maturity.

✅ Correct Answer Explanation

The lifecycle begins with issue of debentures carrying a specified tenure. After expiry of that period, repayment takes place either in lump sum or instalments. Therefore, the correct sequence is 3 → 2 → 1.

❓ Why Other Options Are Incorrect

Option A → Repayment cannot occur first.
Option B → Issue must precede expiry.
Option D → Incorrect chronology.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

�� Follow logical debenture lifecycle.

Final Logic:

�� Issue precedes maturity and repayment.

🧠 Memory Trick

"Issue → Expiry → Repayment"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Redeemable Debentures – Page X

6 Match the advanced concepts:

List 1	List 2
1. Perpetual Debentures	a. Repayable on winding-up
2. Non-convertible	b. Cannot be converted into shares
3. Floating Coupon Rate	c. Tagged with the bank rate
4. Transfer by delivery	d. Bearer debentures

A 1-a, 2-b, 3-c, 4-d

B 1-b, 2-d, 3-a, 4-c

C 1-d, 2-c, 3-b, 4-a

D 1-c, 2-a, 3-d, 4-b

💡 Short Explanation

Perpetual debentures repay on winding up. Non-convertible cannot become shares. Floating rates move with bank rate.

✅ Correct Answer Explanation

Perpetual Debentures are repayable only on winding up. Non-convertible Debentures cannot be converted into shares. Floating Coupon Rate is linked to bank rate fluctuations. Transfer by delivery applies to Bearer Debentures. Hence, option B is correct.

❓ Why Other Options Are Incorrect

Option A → Multiple mismatches.
Option C → Incorrect conceptual links.
Option D → Wrong classifications.

🎯 Strategy

Used

Option Grouping

Application:

�� Match debenture features accurately.

Final Logic:

�� Correct concept mapping identifies answer.

🧠 Memory Trick

"Floating Follows Bank Rate"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Irredeemable Debentures – Page X

7 Convertible debentures can be converted into equity shares or other securities either at the option of:

A The company or the debenture holders

B The secured creditors only

C The government only

D The stock exchange only

💡 Short Explanation

Conversion terms are predefined. Option may belong to issuer or holder. Conversion depends on agreement terms.

✅ Correct Answer Explanation

Convertible debentures may be converted into equity shares according to agreed terms. The option to convert may rest with the company, the debenture holder, or both depending on issue conditions. Therefore, option A is correct.

❓ Why Other Options Are Incorrect

Option B → Secured creditors alone do not control conversion.
Option C → Government has no such role.
Option D → Stock exchanges do not decide conversion.

🎯 Strategy

Used

Conceptual Matching

Application:

�� Identify parties involved in conversion rights.

Final Logic:

�� Conversion rights arise from issue agreement.

🧠 Memory Trick

"Convertible Means Optional Conversion"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Convertible Debentures – Page X

8 Investor Z holds non-convertible debentures. When the company announces a highly profitable year, Z requests to convert these debentures into equity shares to earn dividends instead of fixed interest. What will be the outcome?

A The conversion will be approved instantly

B The conversion requires a formal transfer deed

C Z will receive a floating coupon rate instead

D The conversion will be denied as the debentures cannot be converted into shares

💡 Short Explanation

Non-convertible debentures lack conversion rights. Profitability does not change terms. Fixed interest continues.

✅ Correct Answer Explanation

Non-convertible debentures cannot be converted into equity shares under any normal circumstance because their terms specifically prohibit conversion. Therefore, Investor Z's request will be denied. Hence, option D is correct.

❓ Why Other Options Are Incorrect

Option A → Conversion is not permitted.
Option B → Transfer deed is unrelated.
Option C → Interest type does not automatically change.

🎯 Strategy

Used

Conceptual Matching

Application:

�� Apply meaning of "non-convertible."

Final Logic:

�� Conversion rights do not exist for such debentures.

🧠 Memory Trick

"Non-convertible = No Shares"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Non-convertible Debentures – Page X

9 Which statements are true regarding fully convertible debentures?
I. The entire principal amount can be converted into shares.
II. They are a sub-category under convertibility classification.

A Both I and II are true

B Only I is true

C Only II is true

D Neither I nor II is true

💡 Short Explanation

Entire amount becomes shares. Fully convertible is a convertibility category. Both statements are correct.

✅ Correct Answer Explanation

Fully Convertible Debentures allow complete conversion of principal amount into equity shares. They are classified under the convertibility basis of debentures. Therefore, both statements are true and option A is correct.

❓ Why Other Options Are Incorrect

Option B → Statement II is also true.
Option C → Statement I is definitely true.
Option D → Both statements are correct.

🎯 Strategy

Used

Elimination

Application:

�� Verify both characteristics of fully convertible debentures.

Final Logic:

�� Entire debt conversion defines this category.

🧠 Memory Trick

"Fully Convertible = Full Conversion"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Fully Convertible – Page X

10 Assertion (A): Partly convertible debentures allow the holder to convert the entire debt into equity shares at their discretion.
Reason (R): They are termed 'partly' because only a fraction of the debenture's value is eligible for conversion into shares.

A Both A and R are true

B Both A and R are false

C A is true, R is false

D A is false, R is true

💡 Short Explanation

Only part converts into shares. Entire debt cannot be converted. Reason correctly defines partly convertible debentures.

✅ Correct Answer Explanation

Assertion is false because partly convertible debentures permit conversion of only a portion of the debenture value into equity shares. Reason is true because the term "partly" specifically refers to partial conversion eligibility. Therefore, option D is correct.

❓ Why Other Options Are Incorrect

Option A → Assertion is incorrect.
Option B → Reason is true.
Option C → Assertion is false.

🎯 Strategy

Used

Elimination

Application:

�� Compare full and partial conversion concepts.

Final Logic:

�� Partial conversion distinguishes partly convertible debentures.

🧠 Memory Trick

"Partly Means Partial"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Partly Convertible – Page X

11 Match the exact terminology:

List 1	List 2
1. Fixed Charge	a. Created on specific operational asset
2. Specific Coupon Rate	b. Specified rate of interest
3. Zero Coupon Rate	c. Substantial discount on issue
4. Registered Debenture	d. Name entered in company register

A 1-b, 2-a, 3-c, 4-d

B 1-d, 2-b, 3-a, 4-c

C 1-c, 2-d, 3-b, 4-a

D 1-a, 2-c, 3-d, 4-b

💡 Short Explanation

Fixed charge applies to specific assets. Coupon rate means fixed interest. Zero coupon debentures are issued at heavy discount.

✅ Correct Answer Explanation

A Fixed Charge is created on specific operational assets. Specific Coupon Rate means a predetermined rate of interest. Zero Coupon Rate Debentures are issued at substantial discount instead of paying periodic interest. Registered Debentures require names to be entered in the company register. Hence, option C is correct.

❓ Why Other Options Are Incorrect

Option A → Incorrect mapping of all items.
Option B → Fixed charge and coupon rate mismatched.
Option D → Registered debenture mapping incorrect.

🎯 Strategy

Used

Option Grouping

Application:

�� Match debenture terminology with definitions.

Final Logic:

�� Correct conceptual mapping determines answer.

🧠 Memory Trick

"Zero Coupon = Heavy Discount"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Fixed Coupon Rate – Page X

12 If the central bank increases the bank rate significantly, what is the expected conceptual impact on a floating coupon rate debenture tagged to it?

A The interest rate remains strictly fixed

B The interest rate will likely adjust correspondingly

C The debenture becomes irredeemable

D The debenture is immediately converted to shares

💡 Short Explanation

Floating rates depend on benchmark rates. Bank rate increase affects coupon rate. Interest adjusts dynamically.

✅ Correct Answer Explanation

Floating Coupon Rate Debentures are linked to benchmark rates such as the bank rate. Therefore, if the central bank increases the bank rate, the coupon rate on such debentures is likely to increase correspondingly. Hence, option B is correct.

❓ Why Other Options Are Incorrect

Option A → Floating rates are not fixed.
Option C → Interest changes do not affect redeemability.
Option D → Conversion is unrelated.

🎯 Strategy

Used

Conceptual Matching

Application:

�� Relate floating coupon to benchmark rates.

Final Logic:

�� Floating coupon rates move with reference rates.

🧠 Memory Trick

"Floating Follows Bank Rate"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Floating Coupon Rate – Page X

13 A zero coupon debenture is issued at Rs. 60,000 and has a nominal value of Rs. 1,00,000. It matures in 4 years. What is the total interest amount compensated to the investor over the duration?

A Rs. 1,00,000

B Rs. 60,000

C Rs. 1,60,000

D Rs. 40,000

💡 Short Explanation

Zero coupon return equals discount difference. Rs. 1,00,000 – Rs. 60,000. Total return = Rs. 40,000.

✅ Correct Answer Explanation

Zero coupon debentures compensate investors through the difference between nominal value and issue price. Interest earned: Rs. 1,00,000 – Rs. 60,000 = Rs. 40,000 Therefore, option D is correct.

❓ Why Other Options Are Incorrect

Option A → Represents maturity value only.
Option B → Represents issue price only.
Option C → Incorrect addition.

🎯 Strategy

Used

Substitution

Application:

�� Subtract issue price from maturity value.

Final Logic:

�� Discount amount equals total implied interest.

🧠 Memory Trick

"Maturity Minus Issue Price"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Zero Coupon Debentures – Page X

14 Order the steps for accounting the interest under the discount issue concept:
1. Calculate the difference between nominal value and issue price.
2. Identify the nominal value and the substantial discount issue price.
3. Treat the difference as the amount of interest related to the debenture's duration.

A 1, 2, 3

B 3, 2, 1

C 2, 1, 3

D 2, 3, 1

💡 Short Explanation

Identify values first. Compute difference next. Treat difference as interest finally.

✅ Correct Answer Explanation

The process begins by identifying nominal value and issue price. Next, the difference between them is calculated. Finally, this difference is treated as implied interest over the life of the debenture. Therefore, the correct sequence is 2 → 1 → 3.

❓ Why Other Options Are Incorrect

Option A → Difference cannot be calculated before identifying values.
Option B → Interest treatment comes last.
Option D → Difference must be calculated before treatment.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

�� Follow logical accounting process.

Final Logic:

�� Values must be identified before calculation.

🧠 Memory Trick

"Identify → Calculate → Treat"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Discount Issue Concept – Page X

15 Company Y maintains a detailed book containing names and addresses of individuals holding its debt. Mr. A wants to sell his debt holding to Mr. B. The company mandates a regular transfer deed. What category do these debentures fall into?

A Bearer Debentures

B Registered Debentures

C Zero Coupon Debentures

D Unsecured Debentures

💡 Short Explanation

Company maintains holder records. Transfer deed is compulsory. These are features of registered debentures.

✅ Correct Answer Explanation

Registered Debentures require the company to maintain a register containing holder details. Transfer also requires execution of a proper transfer deed. Therefore, option B is correct.

❓ Why Other Options Are Incorrect

Option A → Bearer debentures transfer by delivery only.
Option C → Interest structure is unrelated.
Option D → Security status is unrelated.

🎯 Strategy

Used

Conceptual Matching

Application:

�� Identify features unique to registered debentures.

Final Logic:

�� Registration and transfer deed define registered debentures.

🧠 Memory Trick

"Registered = Recorded Names"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Registered Debentures – Page X

16 Assertion (A): For bearer debentures, interest is paid to whoever produces the interest coupon.
Reason (R): The company does not keep any record of the bearer debenture holders.

A Both A and R are true, and R is the correct explanation of A

B Both A and R are true, but R is NOT the correct explanation of A

C A is true, R is false

D A is false, R is true

💡 Short Explanation

Bearer holders are unidentified officially. Interest is paid against coupon presentation. No ownership register exists.

✅ Correct Answer Explanation

Bearer Debentures are transferable by delivery, and the company does not maintain records of holders. Therefore, interest is paid to whoever presents the interest coupon. Hence, both Assertion and Reason are true, and Reason correctly explains Assertion.

❓ Why Other Options Are Incorrect

Option B → Reason directly explains Assertion.
Option C → Reason is true.
Option D → Assertion is also true.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

�� Link absence of records with coupon-based payment.

Final Logic:

�� Bearer system depends on physical possession.

🧠 Memory Trick

"Bearer Holds Coupon"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Bearer Debentures – Page X

17 Select the correct statements about transfer by deed:
I. It applies primarily to bearer debentures.
II. It requires entering details in the company's register.

A Both I and II are correct

B Only I is correct

C Neither I nor II is correct

D Only II is correct

💡 Short Explanation

Transfer by deed applies to registered debentures. Company records transfer details. Bearer debentures transfer by delivery.

✅ Correct Answer Explanation

Statement I is false because transfer by deed applies mainly to registered debentures, not bearer debentures. Statement II is correct because transfer details must be entered into the company register. Therefore, option D is correct.

❓ Why Other Options Are Incorrect

Option A → Statement I is incorrect.
Option B → Statement II is also correct.
Option C → Statement II is true.

🎯 Strategy

Used

Elimination

Application:

�� Distinguish transfer by deed from transfer by delivery.

Final Logic:

�� Registered debentures require formal transfer recording.

🧠 Memory Trick

"Deed Means Register Entry"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Transfer by Deed – Page X

18 Why is transfer by delivery considered less secure for the holder compared to transfer by deed?

A Because loss of the physical instrument means loss of ownership, as no company register exists

B Because a transfer deed requires legal stamping and verification

C Because the bank rate fluctuates unpredictably

D Because the interest is paid only on winding up

💡 Short Explanation

Ownership depends on possession. No company record exists. Lost instrument risks ownership loss.

✅ Correct Answer Explanation

Bearer debentures transfer through physical delivery and no ownership register is maintained. Therefore, loss of the instrument may result in loss of ownership rights. Hence, option A is correct.

❓ Why Other Options Are Incorrect

Option B → Legal verification increases security.
Option C → Bank rate is unrelated.
Option D → Interest is not linked to winding up.

🎯 Strategy

Used

Conceptual Matching

Application:

�� Compare security of delivery and deed transfers.

Final Logic:

�� Absence of records increases risk.

🧠 Memory Trick

"Lose Certificate, Lose Ownership"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Transfer by Delivery – Page X

📄 Passage

"Understanding the basis of classification is crucial for investors. Debentures can be categorised by security, tenure, and convertibility. In practice, a company rarely issues a debenture with just one attribute. Instead, it offers combined types to appeal to various risk appetites. For instance, a secured, convertible debenture appeals to those wanting safety along with equity upside, while an unsecured, irredeemable debenture is highly risky."

According to the passage, why is understanding the basis of classification crucial?

A To calculate the exact discount issue price

B It helps investors evaluate the instruments according to their risk appetites

C To ensure the debentures are always transferred by delivery

D To force the company into an immediate winding up

💡 Short Explanation

Different debentures carry different risks. Classification guides investment choice. Investors compare safety and return.

✅ Correct Answer Explanation

The passage explains that debenture classifications help investors choose instruments matching their risk preferences. Different combinations of security, tenure, and convertibility affect risk and return. Therefore, option B is correct.

❓ Why Other Options Are Incorrect

Option A → Classification is broader than pricing.
Option C → Transfer method is unrelated.
Option D → Classification has no relation to winding up.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

�� Identify investor-focused purpose from passage.

Final Logic:

�� Classification supports risk evaluation.

🧠 Memory Trick

"Classification Helps Risk Choice"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Basis of Classification – Page X

📄 Passage

Based on the passage, what combined type of debenture offers safety along with an equity upside?

A Unsecured, irredeemable debenture

B Unsecured, floating charge debenture

C Secured, convertible debenture

D Registered, zero coupon debenture

💡 Short Explanation

Secured debentures provide safety. Convertible debentures provide equity potential. Combined type offers both benefits.

✅ Correct Answer Explanation

The passage specifically states that secured, convertible debentures appeal to investors seeking both safety and equity upside. Security reduces risk while convertibility offers growth potential. Therefore, option C is correct.

❓ Why Other Options Are Incorrect

Option A → Passage describes it as highly risky.
Option B → Floating charge alone does not ensure equity upside.
Option D → Zero coupon does not imply conversion.

🎯 Strategy

Used

Contextual/Tonal Matching

Application:

�� Directly identify combined type mentioned in passage.

Final Logic:

�� Security plus convertibility creates balanced appeal.

🧠 Memory Trick

"Secure + Convert = Safety + Growth"

📚 Class XII – Accountancy Part II – Chapter: Issue and Redemption of Debentures – Topic: Combined Types – Page X

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